The secret weapon

By Zak StamborManaging Editor

It’s a Facebook ad format ideally suited for e-retailers, yet relatively few have tried it. The early adopters don't mind.

John Lusk, chief marketing officer at online women's eyeglass retailer Rivet & Sway, figures he has six months. If he's lucky, maybe nine months. But sometime soon other retailers are going to start catching on to the money he and others are making from ads on the Facebook Exchange (FBX), the social network's real-time bidding system for ads that target consumers based on their off-Facebook browsing.

Rivet & Sway has been working with retargeting vendor AdRoll.com to use FBX since Facebook launched the instant ad-bidding system in September 2012. At the start, the social network only offered display ads—also referred to as right sidebar ads—that appear on the right side of Facebook.com pages for desktop users. Those ads worked relatively well, Lusk says. But the retailer's results really took off when the social network in March began letting marketers retarget consumers based on their off-Facebook activities in users' news feeds.

The e-retailer's news feed ads attract a lot of clicks, and come in at roughly one-third the cost of Google AdWords clicks on paid search ads in Google search results, Lusk says. And that understates the Facebook ads' effectiveness because the robust response from the ads has meant that it hasn't had to include discount offers like it does in its AdWords ads.

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Only 9% of the retailers in the Internet Retailer 2013 Top 500 Guide currently use Facebook Exchange, according to a new analysis by retargeting vendor Triggit Inc. As more retailers begin using FBX, the competition will likely drive up ad prices.

But even if the FBX cost-per-click prices increase, FBX will continue to be an effective tool, Lusk says. The average conversion rate on Rivet & Sway for shoppers who click from FBX ads is nearly 20% higher than those who click on Google AdWords ads, he says. That's higher than every other channel save organic search and e-mail. Lusk declined to disclose the actual conversion rate, or detail how much the retailer pays for ads on Facebook and Google. È È Rivet & Sway is hardly alone in finding success on FBX. The reason, experts say, is simple: A lot of consumers spend a lot of time on Facebook, which means marketers have ample opportunities to pick and choose the right time of day and price to pay to retarget consumers. In July the social network's 131.8 million U.S. unique visitors spent, on average, more than 6 hours and 24 minutes on the site, according to market research firm The Nielsen Co. That time on site translates into 3.5 times more opportunities for marketers to retarget specific consumers than on Google sites that display ads booked via AdWords, according to Triggit Inc.

Facebook Exchange ads are distinct from the social network's other ad formats. The ads aren't social—meaning they don't show a shopper which of his friends Like the brand—and a consumer doesn't have to Like a brand to be targeted with an ad. The ads' main use is for retargeting consumers who have visited a site and then clicked away. And they typically show a consumer a product, either the item he was looking at or similar items.

Given that approach, the ads are specifically tailored to the needs of direct marketers, like retailers, who want to drive a shopper to click directly from the social network to the retailer's site. Because they're direct response ads, marketers have a clear sense of the return on their investment, said Sheryl Sandberg, Facebook's chief operating officer, during the social network's July earnings call. "We've made a very major investment in helping them measure returns and helping them connect what's happening both online and throughout the system," she said. However, there's no self-service option, which means retailers who want to deploy FBX ads have to work with ad brokers.

Also retailers and brokers only have two options where they can place the ads—in the news feed or in the right sidebar ad. As Rivet & Sway found, the news feed ads produce significantly higher click-through rates. Triggit's analysis suggests the click-through rate on FBX news feed ads is 2.7 times higher than that of FBX display ads. However, the FBX display ads are 54% cheaper, on average, than the news feed ads, according to a recent report by MDG Advertising.

Anecdotally, vendors say they may win bids for display ads for as little as a penny, while news feed ads typically require at least $3. But the ads, they say, are like real estate—it's all about location. The news feed is where users spend 40% of their time on the social network, Facebook says.

That isn't to say that FBX right sidebar ads don't work. For online apparel retailer Karmaloop.com the ads are producing, on average, a return about 10 times its investment. Because of that success, which come at a "low cost" that Karmaloop declined to disclose, the retailer has yet to use news feed ads, says Megan Knisely, the retailer's marketing director.

"We've seen such a huge return on our ad spend, it's overwhelming," she says.

Karmaloop skews young—its typical consumer is between 18 and 24—and social. The retailer has 1.1 million Facebook followers and roughly 8.1% of its site traffic stems from social networks, according to Internet Retailer's 2013 Social Media 300. Because many of its shoppers already click from Facebook to Karmaloop.com, the retailer in the spring began working with retargeting and display ad vendor Rakuten MediaForge to use FBX ads to push shoppers who have visited its site to return to make a purchase.

The retailer uses Rakuten MediaForge's algorithm to determine which consumers are most likely to buy after viewing an ad. But in testing the platform Knisely found that targeting only works if the right sidebar ads—which are small, featuring a few lines of text and an image—are vivid enough to capture consumers' attention.